U.S. trade ruling piles pressure on Boeing-Embraer talks

SAO PAULO/BRASILIA (Reuters) - An unexpected U.S. trade ruling last week has added to pressure on Boeing Co and Embraer SA to pull off a proposed tie-up but it will still require careful coaxing to get the Brazilian government on board.

A U.S. trade body shocked the aerospace industry on Friday by scrapping tariffs on CSeries jets sold by Airbus SE and Bombardier Inc, toughening competition for Embraer jets in the 100- to 130-seat segment.

News of the CSeries joint venture in October brought Boeing and Embraer’s long-simmering talks to a boil, according to a person familiar with the matter, accelerating a move that would consolidate a global passenger jet duopoly.

After decades of going head-to-head with Bombardier regional jets, Embraer is looking for its own heavyweight partner. Boeing is also eager to sell a more complete line-up against arch-rival Airbus.

Two sources familiar with the Boeing-Embraer talks said the CSeries winning unfettered access to the U.S. market had strengthened the impetus toward a deal.

“We think a Boeing-Embraer tie-up — either an acquisition or a partnership — is more probable now,” wrote Chris Higgins, a senior equity analyst at Morningstar, after the ruling by the U.S. International Trade Commission (ITC).

The nature of the deal, which Boeing and Embraer have publicly sidestepped by calling it a “potential combination,” will be decisive in overcoming concern in Brasilia about U.S. influence over defence programs.

The Brazilian government can veto any takeover of Embraer due to a so-called ‘golden share’ in the former state enterprise.

Boeing declined to comment on talks in Brasilia and dismissed any connection with U.S. trade policy.

“The recent ITC actions have no bearing on the discussions with Embraer, which pre-date them,” Boeing spokesman Phil Musser said. “This is the natural evolution of a long-standing partnership that has evolved over time.”

Embraer declined to comment. Brazil’s Defense Ministry did not respond to requests for comment.

OWNERSHIP VS CONTROL

The logo of Brazilian jets maker Embraer is seen on a factory in Sao Jose dos Campos, Brazil, December 23, 2017. REUTERS/Leonardo Benassatto

Boeing executives returned to Brasilia last week with details of how they hoped to get “ownership but not control” of Embraer, according to two sources.

Threading that needle has become crucial as President Michel Temer and senior aides publicly ruled out “transferring control” of the planemaker, an icon of Brazilian industry.

“It’s already been settled: control will remain with the federal government,” Temer said in a newspaper interview on Sunday, obscuring the difference between outright ownership, which the government gave up two decades ago, and the golden share that it retains.

Embraer’s controlling bloc of shareholders was dissolved more than a decade ago and Brazil’s public sector now holds less than 10 percent of its shares.

The company’s two biggest shareholders, Britain’s Mondrian Investment Partners Ltd and U.S.-based Brandes Investment Partners LP, together own nearly 25 percent, according to the company’s website.

Yet Embraer bylaws block foreign investors from casting more than 40 percent of shareholder votes and the government’s golden share gives it a strategic veto over takeovers and military programs.

“The golden share guarantees control. The government won’t give that up,” said a presidential aide, who spoke on condition of anonymity. “A commission run by the defence minister has still not delivered its verdict to the president. What I have officially is just that: not giving up the golden share.”

Boeing is willing to maintain the protections of Brazil’s golden share, sources have told Reuters previously, and the company has suggested a range of business structures that would respect the government’s concerns.

While safeguards for defence programs have been central to discussions, sources said the Brazilians may also demand guarantees that Embraer will remain a separate jet manufacturer rather than just a key supplier in the decades ahead.

After Boeing’s acquisition of McDonnell Douglas in 1997, it rebranded the MD-95 as the Boeing 717 only to be outsold by Embraer and Bombardier and eventually shut down the program.

Still, the main sticking point in Brasilia is sensitivity in the armed forces about U.S. influence over Brazilian defence programs, which have been the source of occasional friction in recent years between Washington and Brasilia.

In 2006, the United States blocked Embraer from selling Venezuela dozens of Super Tucano light attack planes, which feature U.S. technology.

Tempers flared again in 2013, when revelations that the U.S. National Security Agency had eavesdropped on Brazil’s then-President Dilma Rousseff cost Boeing a $4 billion-plus fighter jet deal with the rising Latin American power.

Despite the setback, Boeing pressed ahead on partnerships with Embraer, striking a deal for joint services and sales on a new military cargo jet under development and laying groundwork for the broader tie-up now under discussion, sources said.

Reporting by Brad Haynes in Sao Paulo and Anthony Boadle in Brasilia; Additional reporting by Tim Hepher in London; Editing by Susan Thomas